Ecolab(ECL) - 2021 Q4 - Annual Report

Part I Item 1. Business Ecolab is a global leader in water, hygiene, and infection prevention solutions, with $12.7 billion in 2021 sales, operating across three segments and recently acquiring Purolite - In 2021, Ecolab reported sales of $12.7 billion, positioning itself as a global leader in water, hygiene, and infection prevention solutions and services across food, healthcare, hospitality, and industrial markets in over 170 countries[9] - On December 1, 2021, the company acquired Purolite for $3.7 billion in cash. Purolite is a global provider of high-end ion exchange resins for life sciences and industrial markets and is reported within the Life Sciences operating segment[8] - The company completed the separation of its Upstream Energy business (ChampionX) in June 2020. The historical results of ChampionX are now reported as discontinued operations[8] - Ecolab's business is organized into three reportable segments: Global Industrial, Global Institutional & Specialty, and Global Healthcare & Life Sciences, along with an "Other" category[11] - As of December 31, 2021, Ecolab employed approximately 47,000 people, with 42% in North America. The company has set 2030 goals to increase management-level gender diversity to 35% and ethnic/racial diversity in the U.S. to 25%[38] Business Segments Ecolab's business is organized into three main reportable segments and an "Other" category, each serving distinct markets with specialized solutions - Global Industrial: Consists of Water, Food & Beverage, Downstream, and Paper operating segments, serving large industrial customers with water treatment, process applications, and cleaning solutions[12] - Global Institutional & Specialty: Comprises Institutional and Specialty operating segments, providing cleaning and sanitizing products to foodservice, hospitality, lodging, government, education, and retail industries[18] - Global Healthcare & Life Sciences: Includes Healthcare and Life Sciences operating segments, offering infection prevention and contamination control solutions to healthcare, personal care, and pharmaceutical sectors. The recent Purolite acquisition enhances this segment's capabilities in biopharma purification[23][25] - Other: Comprises Pest Elimination, Textile Care, and Colloidal Technologies Group operating segments[28] Additional Business Information Ecolab operates globally, relies on a direct sales force, differentiates through innovation, and holds key intellectual property, with warewashing products being a significant sales category - The company's business is not materially dependent on a single customer. Sales of warewashing products accounted for approximately 10% of consolidated net sales in 2021, down from 13% in 2019[36] - Key intellectual property includes patents related to TRASAR and 3D TRASAR technology (protected until at least 2024) and the Ecolab, Nalco, and 3D TRASAR trademarks, which are material to all segments[40] - Raw materials are generally available from a diverse group of global suppliers, with the largest single raw material representing less than 4% of total raw material purchases[44] Environmental and Regulatory Considerations Ecolab's operations are subject to extensive global environmental and product regulations, with the company committed to ambitious climate goals and having accrued $6.0 million for future remediation expenditures - The company is subject to various chemical and product regulations, including the Toxic Substances Control Act (TSCA) in the U.S. and the Registration, Evaluation and Authorization of Chemicals (REACH) framework in the E.U[48] - Ecolab has set climate goals aligned with the UN's Business Ambition for 1.5°C, aiming to halve GHG emissions by 2030, achieve net-zero by 2050, and move to 100% renewable energy by 2030[52] - Capital expenditures for environmental, health, and safety projects were approximately $28 million in 2021, with a budget of approximately $50 million for 2022[52] - As of December 31, 2021, the company accrued approximately $6.0 million for probable future remediation expenditures related to waste disposal site clean-up activities[54] Item 1A. Risk Factors Ecolab faces various economic, operational, strategic, legal, regulatory, and financial risks that could materially impact its business and financial performance - Economic & Operational Risks: The COVID-19 pandemic continues to pose a risk through supply chain disruptions, labor shortages, and uncertain customer demand, particularly in the restaurant and hospitality sectors[64] - Strategic Risks: The company's growth depends on successful competition, innovation, and the ability to integrate acquisitions. Failure to realize anticipated benefits from the Purolite acquisition or execute key initiatives like ERP upgrades could adversely affect results[75] - Legal, Regulatory & Compliance Risks: The business is subject to numerous environmental, health, and safety laws. Changes in these regulations, potential litigation (such as from chemical spills), or failure to comply could lead to significant financial liability[77][78] - Financial Risks: The company had approximately $8.8 billion in outstanding indebtedness as of December 31, 2021, which could limit operational flexibility. It also faces risks from potential changes in tax laws and the possibility of goodwill impairment, which stood at $8.1 billion[82][86] Item 1B. Unresolved Staff Comments The company reports that it has no unresolved comments from the staff of the Securities and Exchange Commission - There are no unresolved staff comments from the SEC[87] Item 2. Properties Ecolab manufactures most products in-house at its global network of owned and leased facilities, including significant manufacturing plants, distribution centers, research centers, and corporate headquarters - The company's manufacturing philosophy is to produce products in-house where an economic, process, or quality advantage exists. Most products sold are manufactured at company facilities[88] - Corporate headquarters are located in a company-owned building in St. Paul, Minnesota, with a significant research, data, and training campus in Eagan, Minnesota[95] - Significant manufacturing facilities are located globally, including large plants in Joliet, IL (USA); Tai Cang, CHINA; Sainghin, FRANCE; and Asheville, NC (USA)[89] Item 3. Legal Proceedings Information regarding legal proceedings is incorporated by reference from other sections of the report, specifically Note 16, "Commitments and Contingencies," in Part II, Item 8, and the "Environmental and Regulatory Considerations" section in Part I, Item 1 - Details on legal proceedings are cross-referenced to Note 16 of the financial statements and the environmental discussion in Item 1[96] Item 4. Mine Safety Disclosures This item is not applicable to the company - No mine safety disclosures are applicable[97] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Ecolab's common stock trades on the NYSE under "ECL," with 5,185 record holders as of January 2022, and the company repurchased 134,991 shares in Q4 2021 - The company's common stock trades on the NYSE under the symbol ECL[100] Q4 2021 Share Repurchase Activity | Period | Total shares purchased | Average price paid per share | | :--- | :--- | :--- | | October 1-31, 2021 | 129,385 | $212.9777 | | November 1-30, 2021 | 1,658 | $227.1901 | | December 1-31, 2021 | 3,948 | $221.9420 | | Total Q4 2021 | 134,991 | $213.4145 | - As of December 31, 2021, 5,850,187 shares remained available for purchase under the company's publicly announced repurchase plan[101][104] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Ecolab's 2021 performance saw 8% sales growth to $12.7 billion and 15% operating income growth to $1.6 billion, despite cost inflation, supported by strong cash flow and a 6% dividend increase Key Financial Highlights | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Reported Sales | $12.7B | $11.8B | 8% | | Reported Operating Income | $1.6B | $1.4B | 15% | | Adjusted Diluted EPS | $4.69 | $4.02 | 17% | | Cash Flow from Operations | $2.1B | $1.7B | 23% | - Strong sales performance was driven by double-digit growth in Institutional & Specialty and Other segments, along with strong Industrial segment growth, which more than offset a decline in the Healthcare & Life Sciences segment against a very strong prior year[112] - Profitability was impacted by significantly higher delivered product costs and supply constraints, including disruptions from the Texas Freeze and Hurricane Ida[112][143] - The company increased its quarterly cash dividend by 6% in December 2021, marking its 30th consecutive annual dividend rate increase and 85th consecutive year of paying dividends[120] Results of Operations In 2021, reported net sales grew 8% to $12.7 billion, driven by volume and price, though gross margin declined due to higher product costs, while operating income increased 15% despite $266.8 million in special charges Sales Change Components (2021 vs 2020) | Year-over-Year Sales Change Components (2021 vs 2020) | | |:---|:---| | Volume | 3% | | Price changes | 2% | | Acquisition adjusted fixed currency sales change | 5% | | Acquisitions & divestitures | 1% | | Foreign currency translation | 2% | | Reported GAAP net sales change | 8% | - Adjusted gross margin decreased from 41.8% in 2020 to 40.9% in 2021, as increased pricing and higher volumes were more than offset by significantly higher delivered product costs and supply constraints[143] - The SG&A ratio decreased from 28.1% in 2020 to 26.8% in 2021, driven by higher sales, cost savings, and lower bad debt, which offset higher variable compensation[144] - Total special (gains) and charges were $266.8 million in 2021, primarily related to COVID-19 activities ($107.1 million), restructuring ($36.6 million), acquisition/integration costs ($34.1 million), and debt refinancing ($32.3 million)[145][153][148][151][159] Segment Performance In 2021, Global Institutional & Specialty and Other segments showed strong sales and operating income growth, while Global Industrial sales increased but income declined due to costs, and Healthcare & Life Sciences saw declines against a strong prior year Segment Performance (Fixed Currency, 2021) | Segment (Fixed Currency) | 2021 Sales % Change | 2021 Operating Income % Change | | :--- | :--- | :--- | | Global Industrial | 4% | (8)% | | Global Institutional & Specialty | 10% | 72% | | Global Healthcare & Life Sciences | (4)% | (26)% | | Other | 11% | 41% | - Global Industrial: Operating income margin decreased as accelerating pricing was more than offset by significantly higher delivered product costs and supply constraints from events like the Texas Freeze and Hurricane Ida[179] - Global Institutional & Specialty: Strong recovery driven by reopening markets, new business from Ecolab Science Certified programs, and accelerating pricing[182] - Global Healthcare & Life Sciences: Sales and income declined compared to a strong 2020 that benefited from extraordinary COVID-19 related demand for hand and surface disinfection products[188][189] Financial Position, Cash Flow and Liquidity As of December 31, 2021, Ecolab's total assets were $21.2 billion with total debt at $8.8 billion (net debt to EBITDA 3.4x), while generating $2.1 billion in operating cash flow and using $4.6 billion for investing activities, primarily the Purolite acquisition Financial Position Summary | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $21.2 B | $18.1 B | | Total Debt | $8.8 B | $6.7 B | | Net Debt to EBITDA | 3.4x | 2.4x | Cash Flow Summary (2021) | Cash Flow Activity (2021) | Amount | | :--- | :--- | | Cash from Operating Activities | $2,061.9 M | | Cash used for Investing Activities | ($4,579.7 M) | | Cash from Financing Activities | $1,603.2 M | - The increase in cash from operations was primarily driven by higher net income and accruals for variable compensation[199] - The company maintains a $2.0 billion multi-year credit facility expiring in April 2026, which supports its commercial paper programs[204] Item 7A. Quantitative and Qualitative Disclosures about Market Risk This section incorporates by reference the discussions under the headings "Market Risk" and "Global Economic and Political Environment" from Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Information regarding market risk is incorporated by reference from Item 7 of the Form 10-K[216] Item 8. Financial Statements and Supplementary Data This section presents Ecolab's consolidated financial statements, management's report on internal controls (excluding Purolite), and the auditor's report, which highlights critical audit matters related to goodwill impairment and the Purolite acquisition's intangible asset valuation - Management's report asserts that the company's internal control over financial reporting was effective as of December 31, 2021. The assessment excluded the Purolite acquisition, which was completed on December 1, 2021[218] - The independent auditor, PricewaterhouseCoopers LLP, identified two Critical Audit Matters: (1) the goodwill impairment assessment of the Downstream reporting unit due to significant management judgment, and (2) the valuation of the U.S. customer relationships intangible asset from the Purolite acquisition, also due to significant management judgment and complex assumptions[227][229][232] - Note 4 details the preliminary purchase price allocation for the $3.7 billion Purolite acquisition, which resulted in $2.0 billion of goodwill and $1.4 billion of identifiable intangible assets[310][312] - Note 5 provides details on the separation of the ChampionX business, which was accounted for as a sale and resulted in a pre-tax loss on separation of $2.14 billion in 2020, now classified under discontinued operations[323] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles or practices, or financial statement disclosure - None reported[443] Item 9A. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2021, with no material changes except for the Purolite acquisition, while ongoing ERP upgrades are expected to impact internal controls - Management concluded that disclosure controls and procedures were effective as of December 31, 2021[444] - The company is in the process of a multi-year ERP system upgrade which is expected to impact internal controls over financial reporting[446] Part III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, corporate governance, the audit committee, and the code of conduct is incorporated by reference from the company's definitive Proxy Statement for the 2022 Annual Meeting of Stockholders. Information about executive officers is presented in Part I, Item 1 of this Form 10-K - Most information required under this item is incorporated by reference from the company's Proxy Statement[453] Item 11. Executive Compensation All information related to executive and director compensation, including the Compensation Discussion and Analysis, compensation tables, and potential payments upon termination, is incorporated by reference from the company's 2022 Proxy Statement - All information required under this item is incorporated by reference from the company's Proxy Statement[454] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership by certain beneficial owners and management is incorporated by reference from the company's 2022 Proxy Statement. The company provides a table detailing its equity compensation plan information as of year-end 2021, showing securities to be issued upon exercise of outstanding options and securities available for future issuance Equity Compensation Plan Information (as of Dec 31, 2021) | Plan Category | Securities to be issued upon exercise (a) | Weighted avg. exercise price (b) | Securities remaining for future issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 7,450,107 | $160.91 | 7,544,458 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding related person transactions and director independence standards is incorporated by reference from the company's 2022 Proxy Statement - All information required under this item is incorporated by reference from the company's Proxy Statement[459] Item 14. Principal Accounting Fees and Services Information regarding fees paid to the principal accountant and the services rendered is incorporated by reference from the "Audit Fees" section of the company's 2022 Proxy Statement - All information required under this item is incorporated by reference from the company's Proxy Statement[460] Part IV Item 15. Exhibit and Financial Statement Schedules This section provides a comprehensive list of all financial statements, schedules, and exhibits filed as part of the Form 10-K report, including the consolidated financial statements and auditor's report - This section contains the list of all financial statements and exhibits filed with the Form 10-K[469] - Financial statement schedules have been omitted because they are not applicable or the information is already included in the consolidated financial statements or notes[465] Item 16. Form 10-K Summary No Form 10-K summary is provided - None[493]